Question

Imagine that you are forming a partnership with two other partners. All three of you have cash to invest in the business as well as skills to contribute. Two of your partners will provide services, along with investing cash.

• Are there any details you think should be included in the partnership agreement? What disadvantages should you be aware of when forming a partnership?
• How will you allocate income or loss? Will you also include a salary allowance for the partners who contribute services?
• Allocation of partnership income among the partners appears on what financial statement?
• How will you handle the admission of the new partner if he or she purchases an interest in the partnership?

Answer 1

1. Following should be included in a partnership agreement-

a. Nature of Business.

b. Decision making power division

c. Capital contribution requirement

d. Profit sharing ratio

e. Interest on capital

f. Salary for full time partners

g. Audit, annual financial statements, tax returns etc. requirement.

2. Following are disadvantages of forming a Partnership-

a. Unlimited risk e.g. in case of loss, partner to bring more capital

b. Double taxation in some countries

c. No benefit of reduced corporation tax

3. Income or loss should be allocated on the basis of capital contribution which is ideal practice to avoid litigations

4. Allocation of Partnership income appears in Schedule of Capital of Partners.

5. A Partneship admission should be based on the Partnership agreement. generally, if a new partner buys an existing partner's interest, Partnership retains certain percentage and distributes to the other existing partner. There is no other effect on the Partnership interest.